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Press Release · July 14, 1997

Local Fees, Largely Hidden From Homebuyers, Greatly Increase Cost Of Building, Buying New Homes In California

Local Governments, School Districts Using Fees to Finance Growth

SAN FRANCISCO, California, July 14, 1997–Fees on new residential development are adding thousands of dollars to the costs of developers and the mortgages of homebuyers in California, according to a report released today by the Public Policy Institute of California (PPIC). Who pays depends largely on local economic conditions and the strength of the housing market.

Researchers Marla Dresch and Steven Sheffrin analyzed the use of development fees in Contra Costa County–which has experienced rapid growth in recent decades–from 1992 to 1996. “The fees imposed on the construction of new single-family residences were quite staggering–in the range of $20,000 to $30,000 per home,” says Dresch. “Contra Costa’s experience is representative of what’s happening in many fast-growing regions of the state.”

Indeed, California leads the nation in imposing fees on new housing development. The passage of Proposition 13 two decades ago forced cities and counties to seek alternatives to property tax revenue, which historically financed infrastructure–such as roads, schools, and parks–for residential development. Unless state funds are used, local governments have only two alternatives: bonds, which have their own limitations and difficulties, or payments by developers for the right to proceed with a project. Unlike bonds issued to finance infrastructure, which are included on property tax bills, development fees are essentially invisible to homebuyers, who have no way of knowing what kinds of fees were levied against developers or how much of the costs have been passed on in the form of higher home prices.

“Such fees are, in a most basic sense, pro-growth–without them, much development could not happen,” Sheffrin says. “Although many developers believe that they are excessive and stifle economic activity, it is unlikely that local government will reduce their reliance on development fees unless some other source of funding is provided, especially for the construction of schools.”

However, the authors suggest that in the case of school construction, there is an argument for spreading the cost more widely across the population. They note that there are statewide benefits from education–a better-educated workforce, for example–that distinguish it from infrastructure that serves only the local community. Funding alternatives include using state general fund subsidies, as well as state and local general obligation bonds, to cover the costs of new school construction.

“Californians need to decide if the costs of school construction should be more equitably distributed throughout the state and, if so, must adopt changes in financing,” Sheffrin concludes.

The study also found that the ability to pass on fees to homeowners can vary widely within a single county and over a single period of time. Developers in the southern part of Contra Costa County passed on the full cost of fees to the homebuyer, while developers in the eastern area had to absorb about 75 percent of the fees. The difference was primarily due to disparate economic conditions: Although the study occurred during a declining housing market, there was considerably more distress in the eastern part of the county.

Who Pays for Development Fees and Exactions? is part of a series of studies that PPIC has undertaken to improve understanding of state and local governance in California. Future reports will include a citizen’s guide to assessing state and local tax burdens and an analysis of the Orange County bankruptcy.

The Public Policy Institute of California is an independent, nonprofit organization dedicated to nonpartisan research on economic, social, and political issues that affect the lives of Californians. David W. Lyon is President and CEO of PPIC.